Insuring Against Disaster

On Oct. 17 the giant German reinsurance company Munich Re issued a prescient report titled Severe Weather in North America. Globally, the rate of extreme weather events is rising, and “nowhere in the world is the rising number of natural catastrophes more evident than in North America.”

From 1980 through 2011, weather disasters caused losses totaling $1.06 trillion. Munich Re found “a nearly quintupled number of weather-related loss events in North America for the past three decades.” By contrast, there was “an increase factor of 4 in Asia, 2.5 in Africa, 2 in Europe, and 1.5 in South America.” Human-caused climate change “is believed to contribute to this trend,” the report said, “though it influences various perils in different ways.”

Insurers traditionally look back at historical experience to price their premiums. That’s how they justify any premium rate increases to the regulators that approve the prices they charge. That data, however, are becoming less reliable for two reasons. First, there’s the increased frequency of extreme weather events, which you can see charted [above].

Then, there’s also growing population density: If more people live in a small area, and a weather event strikes, that’s more businesses and homeowners likely to file property claims. Taken together, McHale makes the case that these factors are driving up the number of weather-related claims that property insurers pay out.